Investment Shastra

Multibagger returns for how long? What process? Is it repeatable?

Thousands of stocks have jumped to unjustifiable levels in last 1-2 years. ‘Experts’ or Social Media buffs come up with 10 new stocks every week or month and take pride in 5-10% price movements. On asking what they see, they confidently answer, “It is a value buy.”

Most ideas are not exactly an outcome of a process. All that goes in is 10 minutes of financial statement analysis, that’s it. No management analysis or reading annual reports or history of business/industry. Lately the new fantasy is to track some ‘renowned’ investor and follow him into some small cap company. Everyone seems to believe that this will generate great returns for them. They buy it for a month or so, retweet every news related to recommended stocks and when the stock crashes, they simply claim they exited the stock long back! Classic pump and dump tactic. So much for long term investing? May be we should classify it as gambling.

We wonder how one can find so many ideas every week or month. What they identifying seem like quick trades to hop in and out. A few claim to have ability to bag multibagger returns. Note that most of those returns were generated in bullish market sentiment over last 1-2 years. Whether it was a skill or luck can’t be determined over 1-2 years. What will happen to those returns when market turns and crashes 15%?

We really need to ask ourselves do we want to generate good returns just for short span of 2-3 years? Won’t compounding over 10-15 years generate significant wealth? We have to remember compounding generates bulk of these returns. Since we have to be invested over long periods of time, we need to stick to a process. We may pick up any of the process say value investing, momentum investing or growth investing. But we definitely have to keep doing it across market cycles. We don’t have to move out of it exactly at the time it will start working. Investment success of the greatest investors’ is outcome of a particular process they were following throughout their investment career. They stuck to it despite underperformance because they were certain it would work eventually.

Few investors have discussed their processes in media/books like Ray Dalio, Warren Buffett, etc. Others like George Soros, etc. haven’t been explicit but do acknowledge that they follow a process and stick to it.

Many investors/advisors often can’t control behaviour and tweak their process to accommodate all those fancy stocks in their portfolio. They will justify saying that growth justifies X price multiple and the stock deserves to be in portfolio. What essentially they are doing is pleasing customers/self that they have all the winners in their portfolio. This has been observed across most mutual funds/PMS as well.

We do not believe in fantasy and don’t get influenced by the market. We take unbiased view of any stock under analysis. We are experts in value investing philosophy and we are certain if we stick to process, it will definitely generate wealth. We won’t get rich overnight but over long period we will reach our financial goal. There is no award for reaching the goal early, especially if you’re taking high risk. If we are reaching our goal by taking lowest possible risk we are doing it right. No one can take away our goal from us.

We won’t forcefully buy Page Industries or Eicher Motors or Relaxo or Bajaj Finance if they don’t have any margin of safety at the time of purchase. Future is always uncertain and we ought to go wrong someday. Margin of safety saves us from losses in portfolio to great extent. Rest of the risk is diversified by holding 15-18 stocks. That’s our process and we stick to it. We have had periods of average performance for some months as market had run up and we were holding on to liquid funds. But we come back strongly when markets correct and buy into great companies at bargain prices. Eventually we make much more returns than market over 5-7 years. We shouldn’t forget market will always be like a pendulum, it will always swing from one extreme to the other.

Investing is simply about following a proven process and maintain discipline. Lets not seek excitement in investing.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” -Paul Samuelson

“You’re dealing with a lot of silly people in the marketplace; it’s like a great big casino and everyone else is boozing. If you can stick with Pepsi, you should be O.K.” – Warren Buffett

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Ketan Gujarathi

Manager - Equity Research; Based in Pune, a Total of 7 years of work experience ranging from equity analysis, credit rating and banking. MBA in Finance and a Bachelor's degree in Engineering. Passionate about studying companies. Likes reading history & business books. Spends free time with friends and family.

1 comment

  • Dear Sir
    Entirely agree with you.Am your member for the past SEVERAL YEARS.However I follow your VALUE CREATION INDEX.I HAVE REPEATEDLY REQUESTED FOR “VCI” FOR MY OWN DESIRED SET OF STOCKS BESIDES YOUR COVERAGE at “extra pre defined price for purchase”
    Can your organisation assist?
    Best Regards